I have a hs senior child about to enter college, and another a freshman in hs. In years previously, I saved in a UGMA for each of them. Last year, I also started a Roth for each of them.

Why can they have a Roth? As discussed elsewhere on the Fool site, I pay them as household employees (they do dishes and clean house) so they earn income and can establish their own Roths. But they don't actually contribute: as well as paying their wages, I make the contribution to their Roths on their behalf.

Now that I study college financing, I see that the UGMA may be a mistake, since the colleges will expect the student to spend most of that, and since capital gains will need to be paid by the child when the stocks are sold to pay for college expenses. I don't think a child's Roth or traditional IRA will appear on the FAFSA (federal student aid application), but an EIRA will.

I am proposing that for my younger child, I continue to pay them for household labor, but let the child contribute to their Roth out of their UGMA, and me stop contributing to the UGMA. That way, the UGMA shrinks. The child Roths do NOT appear on the FAFSA and the colleges see smaller assets for the child. The child can withdraw the Roth contributions taxfree to pay for college, or for any other purpose. There is conflicting advice whether the Roth earnings could be withdrawn tax free without penalty within five years and before the child is 59 (hopefully she won't be in college that long) if they are used for education expenses. Some sources say yeah, some nay. I think the IRS itself is saying that education expenses are free of penalty for early withdrawals, even on a Roth.

Note that I don't want to transfer from the UGMA to an education IRA (EIRA) since the EIRA appears on the FAFSA as a child asset, whereas the Roth doesn't (the way I read the FAFSA directions.)

The amount that I would have contributed to the UGMA I save in my own taxable or Roth account, and either way, the college wants a smaller percentage of it than they do of a child's savings in their name.

Has anyone else done this, or see flaws in this strategy? Please cite chapter and verse of the FAFSA application or IRS publications. Ha!

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